Following the Pensions Act 2008, a workplace personal accounts scheme for those not currently contributing to a pension scheme is to be phased in from 2012.. Despite the decline in 2008,
Trang 1The climate for pension schemes across the world remains challenging despite
some recovery in 2009 Global pension assets are estimated to have grown by
14% from $25.9 trillion at end-2008 to $29.5 trillion at end-2009 (Chart 1) This
follows an 18% drop from $31.7 trillion during the previous year The US, with
60% of pension assets continues to dominate worldwide A further seven
countries, including the UK, Canada and the Netherlands, account for a third of
assets A pensions market is emerging amongst many of the 60 further countries
for which data are available
The sharp rise in liabilities in major economies in the past two years poses a
major challenge to the funding of defined benefit (DB) pensions globally In
2008 and 2009, the asset/liability indicator in 11 major economies fell to its
lowest level during the past decade (Chart 2) The 2009 indicator of 75 (25%
below the 1998 base year indicator of 100) represented a partial recovery from
end-2008, when a combination of a 15% drop in assets and a 12% rise in
liablities contributed to a sharp fall in the indicator from 90 to 68
Following the rise in most asset classes rising in 2009, returns of global pension
funds returns have been positive Equities markets have recovered from a low
point; hedge funds have seen a rebound; and bond returns have been steady In
2008 pension fund returns in most countries had turned negative as most asset
types fell in value
The UK faces a number of challenges relating to the financing of both public
and private sector provision Increasing costs have resulted in the closure of
many private sector DB schemes Only 22% of DB private sector schemes
remain open to new members in 2009, down from 35% in 2006 and
membership of active DB schemes has halved to 2.6m since the early 1990s
Contributions to the defined contribution (DC) schemes that have replaced
them, at 9% of salary, are only about half that to DB schemes
The real return on UK pension funds reached 15% in 2009 but the average real
return of 1% over the past decade is depressed by four years of negative returns
The aggregate deficit for FTSE 100 companies rose to £96bn in July 2009
Business written in the insured buyout market declined in 2009 due to
volatility in credit markets and rising costs of buyouts caused by the fall in the
value of pension fund assets
Following the Pensions Act 2008, a workplace personal accounts scheme for
those not currently contributing to a pension scheme is to be phased in from
2012 DB remains the dominant form of provision in the public sector While
there have been some reforms to public sector schemes a substantial deficit
remains estimated at £764bn for major schemes in March 2008
In recent years, more people of pensionable age have been supplementing their
pension by staying in work UK employment amongst those of pension age has
been rising: by 70,000 in the first 11 months of 2009 and by over 500,000 in
total since 2002 to reach 1.4 million in November 2009
2010
Chart 1 Global pension assets
0 4 8 12 16 20 24 28 32
2009 2008 2007 2006 2005 2004 2003 2002 2001
OECD: Autonomous pens funds
OECD: Other managed funds OECD: Pension insurance Non-OECD countries
Source: OECD, UBS, IFSL estimates
Pension assets, $ trillion, end-year
17.1
25.1 22.6
28.5
16.3
31.7
19.8
25.9 29.5
Chart 2 Asset/liability indicator for global
pension funds
Source: Towers Watson
Pension fund assets, liabilities & asset/liability indicator for
11 major economies, 1998=100
Asset/liability indicator Liabilities
60 80 100 120 140 160 180
2009 2007 2005 2003 2001 1999
Assets
Trang 2INTERNATIONAL PENSION MARKETS
Detailed figures for global pension assets for end-2008 were published by
OECD in October 2009 As indicated in the overview, the total value of pension
assets managed globally fell by 18% from $31.7 trillion at end-2007 to
$25.9 trillion at end-2008 (Chart 1) IFSL estimates that global pension fund
assets rose by 14% to reach $29.5 trillion by end-2009 The global market is
dominated by the US, which accounts for 60% of assets (Tables 1 & 2) The next
largest markets are the UK with 9% of assets, Canada 6%, the Netherlands and
Australia each with 4% and Japan 3% The large value of assets accumulated
over many decades means that these countries will remain the dominant source
of assets for years to come Pension assets in Brazil were the largest outside the
OECD, followed by South Africa and Singapore
The large drop in the value of assets during 2008 was caused by negative returns
from equities and alternative asset classes, the latter having much higher
correlation to equities in a market sell-off than anticipated Previously, growth
in assets in the years to 2007 was based on expansion in funding aided by
pen-sion reform and recovery in equity markets from 2002
The steep decline in assets in 2008 coincided with a rise in liabilities which
resulted in an unprecedented deterioration of 36% in the asset liability ratio in
OECD countries
US
UK
Canada
Netherlands
Australia
Japan
Denmark
Switzerland
Sweden
France
Finland
Germany
Spain
Mexico
Ireland
Italy
Korea
Poland
Other OECD
OECD total
Non-OECD countries
Brazil
South Africa
Singapore
Chile
Israel
India
Hong Kong
Other non-OECD
Non-OECD total
Global total
Autonomous
pension
funds
8292
1511
760 988 947 874 162 497 35 22 160 172 114 113 93 78 28 58 167
15070
-Book reserves -186 -9 -22
-218
-Pension insurance contracts 2151 325 66 -297 -229 175 21 -10 33 0 0
3306
-Table 2 Global pension assets
Other funds 3246 -511 -30 -9
-3796
-Source: OECD, UBS
Pension fund assets managed in each country, $bn, 2008
Total pension assets 15612 2318 1523 988 977 874 519 497 280 199 181 172 137 130 93 88 71 58 170 24889
288 150 91 89 86 62 60 164 990 25879
% share 60.3 9.0 5.9 3.8 3.8 3.4 2.0 1.9 1.1 0.8 0.7 0.7 0.5 0.5 0.4 0.3 0.3 0.2 0.7 96.2
1.1 0.6 0.4 0.3 0.3 0.2 0.2 0.6 3.8 100.0
Inv cos.
managed funds 1532 482 -3 -3 -2
2023
-Banks managed funds 391 -61 -7 -5 -11 -1
476
-US Canada UK Netherlands Denmark Switzerland Sweden France Finland Germany Spain Ireland Italy Poland Portugal Norway Iceland Austria Belgium Russian Fed Hungary Other Europe Australia Japan Singapore Chile Korea India Hong Kong Thailand New Zealand Other Asia Brazil Mexico Colombia Argentina Peru Other L.America South Africa Israel Other Africa & M.East
World total
2001 12523 743 1486 411 154 261 73 -70 65 35 46 25 5 13 9 7 6 13 -2 2 268 756 -24 5 8 1 -27 5 -4 -29 3
17079
2007 20244 1636 3323 1058 438 505 261 179 195 154 129 119 77 51 35 27 28 18 20 15 15 28 1000 944 91 106 77 62 65 13 15 14 288 120 31 30 20 21 150 55 7
31661
2008 15612 1523 2318 988 519 497 280 199 181 172 137 93 88 58 32 27 20 18 17 15 15 37 977 874 91 89 71 62 60 14 14 14 288 130 35 30 17 22 150 86 7
25879 Table 1 Global pension assets
Source: OECD, UBS
$bn, pension fund assets, end-year % change
2008 -23 -7 -30 -7 19 -2 8 11 -7 12 6 -22 15 13 -8 -1 -27 2 -18 0 -1 31 -2 -7 0 -15 -7 0 -7 9 -6 0 0 8 12 0 -11 4 0 58 0 -18
Trang 32008, adding to the challenge of funding defined benefit (DB) pensions over the
long term (Chart 2) The subsequent rise in assets and drop in liabilities during
2009 has only partly redressed the previous year’s deterioration in the asset
liability ratio
The 30% fall in pension assets in 2008 recorded by the UK was the largest in
the dataset, partly caused by the depreciation of the pound Large falls in assets
were also recorded by the US Ireland and Chile Despite the decline in 2008,
growth in value of assets is expected across a broad range of countries over the
long term, including countries with established systems as well as those where
pension markets are at an earlier stage of development The latter include the
Pacific Basin, such as China and South Korea; Latin American countries as well
as countries in central and eastern Europe
Pension assets of $24.9 trillion in 30 OECD countries accounted for 96% of the
end-2008 global total (Table 2) The main categories consist of:
- Autonomous pension funds invested in occupational pensions in 30
countries accounted for the bulk of assets: $15.1 trillion, 58% of the global
total
- Pension insurance contracts are operated by life and pension insurance
companies: $3.3 trillion reported in 11 countries
- Book reserves consist of pension reserves or provisions in the balance sheet
of the sponsoring company: $0.2 trillion identified in three countries
- Investment companies’managed funds: $2.0 trillion in five countries.
- Banks’managed funds: $0.5 trillion in six countries.
- Other funds: $3.8 trillion
Assets of non-OECD countries:
- Pension assets identified in 37 non-OECD countries reached $0.99 trillion.
Many developed countries have extensive funding pension arrangements At
end-2008 pension fund assets exceeded 100% of national income in Denmark,
the Netherlands, the US, Canada and Switzerland (Chart 3)
Assets between 50% and 100% of GDP have been accumulated in Australia, the
UK, Finland, South Africa and Chile While autonomous pension funds remain
the primary focus of investment in the US, the UK, Canada and the Netherlands,
they remain scarce in other large countries of western Europe: Germany, France
and Italy Pension insurance policies and personal pensions are also an
important source of provision: accounting for the majority of pension assets in
Denmark and Sweden, and for 14% in the UK Assets in retirement products,
other than pension funds and pension insurance, make up 46% of assets in
Canada and 33% in the US
Rates of return OECD data for the first half of 2009 shows positive returns for
most countries, particularly some emerging markets, such as Hong Kong, Chile
and Israel, which emerged more quickly from recession (Chart 4) The gains
were rather less for OECD countries with Norway and Switzerland at the upper
end recording returns of 10% and 7% The outturn for the whole of 2009 was
much higher for countries such as the UK and US with significant equity
allocation due to the rebound in equity markets in the second half of the year
Positive returns in the first half of 2009 represented a turnaround from 2008
Chart 3 Pension assets relative to size of economy
Source: IFSL estimates based on OECD & World Bank data
Pension assets as % of national income, 2008
Russian Fed Italy Germany India France Korea Spain New Zealand Poland Mexico Portugal Japan Brazil Hong Kong Ireland Sweden Israel Singapore Chile South Africa Finland UK Australia Switzerland Canada US Netherlands Denmark
Chart 4 Pension funds nominal rate of return
Source: OECD
Nominal rate of return, 2008 & first half 2009
-35 -30 -25 -20 -15 -10 -5 0 5 10 15
Turkey Korea Czech Rep Italy Spain Norway Israel Switzerland Poland Chile Canada Netherlands UK Australia US Hong Kong Ireland
First half 2009 2008
Trang 4when nearly all countries experienced negative returns, the exceptions being
South Korea and Turkey By contrast, Ireland, the US, Australia and the UK
suffered the largest falls in 2008 with nominal returns dropping by at least 18%
in each of these countries
Asset allocation While changes year-to-year in asset allocation over the past
decade been heavily influenced by volatility in equity markets, this is less
influential when viewed over the period between 2003 and 2008 Trends in
asset allocation in recent years amongst five of the major asset managing
countries - the US, Japan, the UK, the Netherlands and Australia - are shown
in Chart 5:
- The share of equities fell in all five countries, with the exception of
Japan, mainly due to the decline in equity markets in 2008 Amongst
these five countries at end-2008 the share of equities was highest in the
UK at 56% and lowest in the Netherlands at 26%
- Allocation to bonds fell sharply in Japan, where it dropped from 45% to
32%, while in the UK allocation to bonds more than doubled from 15%
to 34% It also rose sharply in the Netherlands, rising from 40% to 58%
- The share of assets invested in cash, real estate and other investments
varies The most significant development in 2008 was in Australia where
the share of these assets jumped from 27% in 2007 to 41% in 2008
The recovery in pension funds’ global rates of return in 2009 was based on a
rebound in both equity markets and hedge funds, with bond returns steady
(Chart 6)
Broader trends in OECD The substantial allocation to equities in the five
countries in Chart 5 is not reflected in asset allocation elsewhere in the
OECD, where bonds continue to rank first In 13 countries, including
Denmark, Norway, Poland and Mexico, bonds accounted for over 50% of
assets at end-2008 If cash is included then fixed interest investments make
up over a half of assets in 19 countries altogether Equities make up over a
half of portfolios in only two OECD countries and less than 25% in 18
countries, including Spain, Mexico, South Korea and the Czech Republic,
where the share is 15% or less
Factors driving reform of pension systems worldwide
Pension systems in many countries have been closely reviewed as a result of
demographic trends and also because of accounting standards that have
increased the transparency of pension liabilities:
Demographic trends Increased longevity, falling birth rates, and early
retirement mean dependency ratios of many developed countries particularly in
Europe and Japan are set to rise over the next half century In Europe in 2010
there were on average around four people of working age to every pensioner,
implying a dependency ratio of about 25% However, by 2050 this dependency
ratio will have increased to 62% in Italy and 59% in Germany (Chart 7) The
increase to 38% in the UK is rather less than elsewhere in Europe
Lower birth rates and increased longevity are also affecting countries of Central
Chart 5 Asset allocation of pension funds
% share of pension fund assets
6
Bonds Equities
Australia
Netherlds.
UK
Japan
Source: UBS Pension Fund Indicators
2008 2003 2008 2003 2008 2003 2008 2003 2008 2003
US
Other
*First 11 months of 2009 Source: Greenwich Alternative Investments, S&P 500, Barclays
-40 -30 -20 -10 0 10 20 30
2009*
2008 2007 2006 2005 2004 2003 2002 2001 2000
Bonds
Equities
Annual average % rate of return
Chart 6 Rate of return on assets worldwide
Hedge funds
Trang 5and Eastern Europe and some Asian countries: the dependency ratio is
projected to be highest in Japan at 74% in 2050 It is set to soar in China from
11% to 38% over the period from 2010 to 2050, partly a result of the policy of
one child per family that has been pursued over the past 30 years It will also rise
to a lesser extent in India The dependency ratio in Latin America and Asia is
projected to rise from 10% in 2010 to 29% and 27% respectively by 2050
Costs and inadequacies of state pension systems State pension systems are
largely funded on a pay-as-you-go (PAYG) basis The impact of ageing
populations and increased dependency has drawn attention to the rising cost of
financing generous state pension systems on a PAYG basis This is most
apparent in the measure of expenditure on PAYG pensions as a share of GDP
being in the range of 9-14% in Italy, France, Germany and Spain, compared with
7% in the UK This cost burden is unsustainable and has been the key driving
force in policy responses including pension reform that have taken place in the
larger countries of continental Europe
In many developing countries economic growth and rising living standards have
highlighted the inadequacies of state pension systems and their failure to meet
the increasing aspirations of individuals for a bigger income in retirement
Inadequacies are revealed in poorly managed systems, high contribution rates,
growing evasion and increasing likelihood of deficits Most emerging market
countries that are members of the International Federation of Pension Fund
Administrators (FIAP) have undertaken some reform of their pension system
Key elements of pension reform are set out on page 10
Deficits in occupational defined benefit (DB) schemes Occupational DB
pension schemes in a number of countries face long-term deficits caused by a
gap between assets and liabilities Deficits have been highlighted by the
convergence of international accounting standards which mean that unfunded
pension liabilities must be reported on a marked to market basis, using bond
yields for discounting the liabilities.As a result deficits of pension schemes have
become transparent on the balance sheets of sponsoring companies
An OECD comparison of companies’ DB pension fund obligations shows that
most countries with available data reported an aggregate deficit at end-June
2009 As a share of obligations the deficit was highest in Spain at 31% and
Japan 28%, with Ireland, the UK and the US at between 12% and 18%
(Chart 8) Canada, Switzerland and the Netherlands had deficits below
10% while Australia was the only country with a surplus measured at 12%
of obligations For most of the nine countries included in Chart 8 the deficit
had widened in 2008 but narrowed in the first half of 2009
Similarly, a survey of the FTSE100 Global indes by Lane Clark & Peacock
found that for many of world’s largest companies the position on financing
of pensions deteriorated in 2008 Only 6 companies reported a surplus in
2008 compared with 21 in 2007, and the aggregate pension deficit
ballooned from $19bn to $154bn (Table 3) As a percentage of market
capitalisation, the average deficit in the survey was over 7% for German
companies, 5% for French companies and around 3% for the Swiss, UK
and US companies, although these averages mask a broad spread
Chart 7 Elderly dependency ratios by country
Source: UN Population Division: World Population Prospects: 2008 Revision
Population aged over 65 as a percentage of working age population (15-64), UN projection
52
35 62
31
59
31
19
2010 2050
0 15 30 45 60 75
India US
China UK
France Germany
Poland Italy Japan
35
11 26
38
25
47
38
19 74
8 20
France Germany Netherlands Switzerland UK US Asia Pacific Middle East Other EU
Total
Number of companies 2008 6 6 1 7 14 47 9 1 7
98
Source: Lane Clark & Peacock
Mkt.cap
€bn 2008 276 175 48 359 615 2488 360 13 5368
9704
Table 3 Pension deficits in global stocks
€bn 2007 -11.8 -6.5 -0.3 1.3 5.1 10.9 -2.2 -0.1 -15.9
-19.4
Surp./def.
as % of mkt.cap 2008 -5.0 -7.6 -5.5 -2.7 -3.1 -3.0 -1.2 -1.0 -0.3
-1.6
Pension schemes of FTSE Global 100 Index
Liabilities
as % of mkt.value 2008 11 41 30 21 23 13 16 1 14
16
€bn 2008 -14.0 -13.3 -2.7 -9.7 -19.3 -74.1 -4.2 -0.1 -16.9
-154.2
Surplus/deficit
Chart 8 DB pension fund obligations
Source: OECD
Surplus or deficit, % share of pension fund obligations
mid-2009 end-2007
-40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 Spain
Japan US UK Ireland Netherlands Switzerland Canada Australia
end-2008
Trang 6UK PENSIONS MARKET
Analysis of the UK pensions market begins with recent trends in market size
and allocation of assets as well as returns It continues with the key challenges
facing the pensions industry and the UK’s policy response
Market size The pensions industry in the UK is the second largest in the world
after the US, with assets managed on behalf of domestic clients totalling
£1,250bn at end-2008 The sizeable asset base arises from substantial funding of
pensions and significant voluntary provision, with £815bn managed in
occupational schemes; £175bn of funds in pension insurance contracts; and
assets totalling £260bn in personal pensions The closure of many private sector
pension schemes means that DC share is growing steadily There is less
dependence on the state pension and the long-term demographic profile is more
favourable than in many other European countries
Asset allocation The majority of assets in UK pension funds are invested in
equities although their share in portfolios has dropped from 75% in 1999 to 56%
in 2008 The majority of equity investment is steered to international equities,
which account for 31% of total assets, while the share of domestic equities has
halved over the past decade to 25% The share of domestic bonds has also more
than doubled from 13% to 29% during this period, in part reflecting the steady
growth in the issue of government bonds as borrowing has risen
Rates of return BNY Mellon estimated that the nominal rate of return of UK
pension funds rose by 14.0% in 2009, implying a real increase of 14.8%, as retail
prices fell by 0.7% on average during 2009 (Chart 9) The rate of return was
lifted by the recovery in equity markets and also by the depreciation of sterling
which increased the sterling value of returns from overseas investments
However, a total of four years of negative returns over the past decade mean that
real returns have averaged only 1.1% a year between 2000 and 2009 Over the
46 years since 1963 UK pension funds have generated real returns averaging
4.2% a year
Key challenges relating to financing of UK pensions
The UK faces a variety of challenges in relation to the financing of both public
and private sector pension provision
Financing of private sector DB schemes The increasing cost of operating DB
schemes in the private sector has resulted in closure of many such schemes to
new members As a result the number of active members in private sector DB
schemes dropped from a peak of 5.7m in the early 1990s to 2.6m in 2008 and
2009 (Chart 10) By contrast, membership of open public sector schemes has
grown from 4.1m in 1995 to 5.4m in 2008 While members of occupational
private sector DC schemes have been relatively stable at around 1m over the past
decade, this does not include growth in stakeholder and group personal pension
schemes
The decline in DB is relected in the sharp drop in the share of schemes that
remain open to new members, down from 35% to 22% between the 2006 and
2009 editions of the Pension Protection Fund’s Purple Book (Chart 11) A
Chart 9 UK pension fund rates of return
Source: UBS, BNY Mellon
1 Change in average pension fund deflated by retail price inflation
1963-2009 4.2%
Average real rate of return (% per year) 1
-20 -15 -10 -5 0 5 10 15 20
2009 2007 2005 2003 2001 1999 1997 1995
2000-2009 1.1%
Chart 10 Membership of active occupational
pension schemes in UK
Source: ONS Occupational Pension Schemes Annual Report
Millions of members
Private sector DB Public sector
0 1 2 3 4 5 6 7 8 9 10 11
2008 2007 2006 2005 2000 1995 1991
Private sector DC
Trang 7further 20% are closed to future accruals, while 55% are closed to new
members
For all private sector DB schemes, whether open or closed, the sponsor of the
pension fund has to match assets and liabilities over the long term The value of
UK pension funds is calculated on a going concern basis so schemes may
require additional injection of funds for a variety of reasons: these include a
decline in value of scheme assets, an increase in life expectancy and lower yields
on long-term government bonds
FTSE 100 pension schemes The financial position of FTSE 100 pension
schemes deteriorated during 2009 with Lane Clark & Peacock estimating an
aggregate deficit of £96bn in July, several times the £16bn shortfall at end-2008
(Chart 12) Companies with the largest pension deficits in 2008 were Royal
Dutch Shell, BAe Systems, BP, Unilever, HSBC Holding and Royal Bank of
Scotland Group Interim estimates of the deficit between mid-2008 and
mid-2009 were volatile For example, the aggregate deficit was eliminated for
part of the fourth quarter of 2008 due to soaring yields in the AA corporate
bonds despite falling equity markets at that time
The yield on high quality corporate bonds is set as the benchmark in IAS19
accounting regulations for discounting the net present value of future liabilities
The higher long-term bond yields have stemmed from widening spreads related
to the credit crunch Lane, Clark and Peacock note that volatility in the value of
FTSE 100 pension schemes draws attention to two major issues relating to the
IAS19 standard
- Firstly, the calculation of different companies’ pension schemes can no
longer be easily compared because of the disparity in corporate bond yields
At end-2006, yields were bunched between 5% and 6%, but by end-2008,
they were dispersed between 2% and 12%, before narrowing somewhat to
between 1% and 8% in September 2009 As a consequence, the valuation
of pension liabilities can vary substantially
- Secondly, cash funding can no longer be directly related to valuation of
pension schemes This is due both to the dispersion of corporate bond yields
and to volatility in credit spreads since mid-2007 The stable relationship
that previously existed between pension liabilities and trustee funding
measures is much weaker
About a quarter of FTSE100 companies that took steps to mitigate
pension-related investment risks, through reduction of equity exposure, use of
financial swaps and purchase of annuities, have been better protected during the
financial crisis On a wider front, the increased pressure on cashflow means that
companies are having to balance trustees requirements for contributions to meet
ever increasing deficits; shareholders’ demands for dividends; and companies’
need for capital expenditure
Pension Protection Fund The Pension Protection Fund (PPF) was established in
2005 to compensate members of eligible defined benefit pension schemes in the
event of their employer becoming insolvent and where there are insufficient
assets in the pension scheme to cover Pension Protection Fund levels of
Chart 12 FTSE 100 pension schemes
Source: Lane, Clark & Peacock
Aggregate surplus/deficit of FTSE100 pension schemes, June & December, £bn
Surplus Deficit
-100 -80 -60 -40 -20 0 20
2009 2008 2007 2006 2005 2004 2003 2002
Chart 11 Distribution of UK DB pension schemes
by status*
*Excluding hybrid schemes that are a combination of DB & DC Source: Pension Protection Fund The Purple Book
% share of UK DB pension schemes
Closed to new members
Open to new members
Closed to future accruals Winding up
Year of Purple Book publication
0 20 40 60 80 100
2009 2008
2007 2006
22 27
52
3
18
3
32 50
17
1
15
35
20
49
55
1
Trang 8compensation Out of around 7,375 eligible schemes, there were 363 in a PPF
assessment period in January 2010, up from 240 in March 2009 (Chart 13) The
PPF is funded by levies on all eligible pension funds The levy is currently
indexed to rise in line with average earnings so is projected to rise from £651m
in 2008/09 to £700m in 2009/10 and to £720m for 2010/11 The levy was
equiv-alent to 0.08% of eligible assets in 2007/08 The number of eligible schemes has
fallen from over 7,700 in March 2008 as a result of scheme mergers, schemes
buying out benefits with an insurance company (insurance buyouts) and
schemes transferring into the PPF compensation scheme
Insurance buyout market The buyout market provides a means of securitising
pension liabilities with an insurance company with the eventual aim of winding
up the scheme For companies that have closed their defined benefit schemes,
the insurance buyout market represents an option for full or partial exit from
managing their pension liabilities Traditionally, the main recourse to this
market was for businesses that were insolvent or in serious difficulty Although
business written in the insured buyout market rose in 2007 and 2008, aggregate
deal levels have since fallen off due to volatility in credit markets as well as the
rising costs of buyouts as insurance companies factored in the fall in the value
of pension fund assets
Financing of DC schemes The rising cost of DB schemes has led companies
and other organisations to switch funding of pension schemes to DC
particularly for new employees Average investment into DC schemes is
substantially less than the DB schemes they have replaced The Occupational
Pension Schemes Survey found that in 2008, open DC schemes were only
contributing 9% of salary, compared with 20% for open DB schemes (Chart 14)
These rates of contribution were much the same in the two previous years
Employer contribution was 6.6% in the open DC schemes less than half the
14.6% of open DB schemes Member contributions to open DB schemes were
typically 5% of salary compared to 3% for DC schemes
There are concerns that retirement income generated from these schemes will
prove to be inadequate because funding is on average only half that of a DB
scheme Moreover, expected payouts on annuities financed by DC schemes
have fallen as expectations of lower inflation over the long term have reduced
the yield on long term government securities Retail price inflation rose to an
average of 4% in 2007 and 2008, but fell to -0.7% in 2009 The 18 year period
from 1991 to 2009 has seen a relatively low rate of inflation averaging 2.7% a
year sustained (Chart 15).As a result yields on government securities, which are
used as the basis for payouts on annuities, have fallen The average yield on
2.5% index-linked bonds eased back to 1.1% in 2009 from an average of 1.8%
in the previous five years The yield was an average of 3.6% in the 15 years to
1997 The average yield on government securities with a 10 year term, fell back
to 3.7% in 2009 from 4.6% in 2008
The impact of low levels of pensions and other retirement income is reflected in
growing employment in those of pensionable age Having risen only slightly
during the 1990s employment in this group has increased at a faster pace in
recent years: by around 73,000 a year or 510,000 in total from 900,000 at
end-2002 to 1.41m in November 2009 (Chart 16) This rise was sustained
Chart 14 Contribution rates to UK pension schemes
Source: ONS Occupational Pension Schemes Annual Report
Type of pension scheme, contribution rates as % of salary
9.0
2008 2007 2006
2008 2007 2006
20.5 19.7 9.0
19.7
8.9
Open DB
Open DC
Employee Employer
Chart 13 Pension Protection Fund
*Number of qualifying schemes in January 2010 Source: Pension Protection Fund
Annual levy, £m Number of qualifying schemes, March
Levy
Qualifying schemes
0 100 200 300 400 500 600 700 800
2011 2010*
2009 2008
2007
Year ending March
0 50 100 150 200 250 300 350 400
Trang 9during the first 11 months of 2009 with a further increase of 70,000 despite the
recession
Financing of public sector DB schemes The substantial shift to DC in the
private sector is not reflected in the public sector where employees are largely
financed through DB schemes As indicated in Chart 10, members of public
sector pension schemes have grown to 5.4m Some reforms have been put in
place to address the growing liabilities These include a move in some cases to
career average salary instead of final salary; a move to sharing costs above a
certain defined level between employees and employers; and a move to higher
pension ages for new entrants Despite these reforms a substantial unfunded
deficit is outstanding Liabilities for the four largest centrally-administered
unfunded schemes - NHS, teachers, civil service and armed forces - were
officially estimated at £605bn in March 2008 In addition the funded Local
Government Pension Scheme had liabilities of £159bn at that date, making total
identified liabilities of £764bn in March 2008 Without further reform, this
shortfall will have to be funded on an ongoing basis by the taxpayer
UK policy response
Recent years have seen a raft of measures to reform pension provision and map
out the proposed way forward on pensions in the UK These measures
culminated in the legislation as set out in The Pensions Act 2007 and The
Pensions Act 2008 The Pensions Act 2007, set out in the side panel on page 10,
focused on long term structural reforms in the state pension system and state
pension age, with the latter to be implemented over the period to 2046 The
Pensions Act 2008 set out reforms to workplace pension provision including
auto enrolment with minimum employer contributions The overall intention is
to put the financing of pension provision on a sustainable basis over the long
term and to ensure appropriate pension provision for each individual
These measures followed other reforms to personal and workplace pensions that
have come into force in recent years The Pension Protection Fund (noted on
page 7) was established in 2005 while key measures in 2006 were intended to
simplify and standardise pension provision These included: a lifetime limit on
the value of any personal pension fund, initially set at £1.5m; tax-free lump sum
on retirement fixed at a maximum of 25% of the fund; and pension contributions
of up to £2,800 a year to be eligible for tax relief even when the contributor is
not a taxpayer
The Pensions Act 2008
The Pensions Act 2008 contains a number of measures aimed at encouraging
greater workplace pension saving It is planned that all eligible workers, who are
not already in a good quality workplace scheme, will be automatically enrolled
into either their employers’ pension scheme or a new savings vehicle This
scheme, originally entitled the personal accounts scheme, has been rebranded
the National Employment Savings Trust (NEST) by the organisation responsible
for its delivery: Personal Accounts Delivery Authority (PADA) To encourage
participation, employees’ pension contributions will be supplemented by
contributions from employers and tax relief
Automatic enrolment to NEST The plan as set out in the Act is that from 2012,
Chart 15 UK inflation rate & bond yield
Source: Office for National Statistics, Bank of England
Retail prices index, annual % change, Bond yield, % annual average
-2 0 2 4 6 8 10 12
2009 2006 2003 2000 1997 1994 1991 1988
Retail prices index
Yield on 10 year govt securities
Yield from 2.5% Index Linked Treasury Stock 2016
Chart 16 UK employment in people of
pensionable age
*November 2009 Source: Office for National Statistics,
0 200 400 600 800 1000 1200 1400
2009* 2007 2005 2002 1999 1996 1993
Employment of women over 60 and men over 65, Thousands, end-year
Men over 65
Total
Women over 60
Trang 10employers will automatically enrol eligible workers’between the ages of 22 and
State Pension Age who are not already in a qualifying scheme into a qualifying
workplace pension scheme (which can include the new ‘personal accounts’
scheme) Automatic enrolment means instead of choosing whether to join a
workplace pension scheme provided by their employer, all eligible workers will
have to actively decide not to be in a scheme, if for any reason they take the view
that this is not a suitable form of personal saving for their situation
Minimum employer contribution For the first time all employers will eventually
be required to contribute a minimum of 3% (on a band of earnings) to an
eligible employee’s workplace pension scheme This will supplement the 4%
contribution from the employee and around 1% from the Government in the
form of tax relief
Personal accounts Personal accounts are aimed at employees who don’t have
access to a good quality work based pension scheme - in the main, median to
low earners The scheme, which will run as an occupational pension scheme,
will have low charges and have a contribution limit of £3,600 per year and a
general ban on transfers in and out of the scheme, to focus the scheme on the
tar-get market
Auto-enrolment of elible workers into personal accounts will begin in October
2012 and will be fully phased in by October 2017 The largest businesses with
over 120,000 employees will pay into a pension scheme from October 2012
Employers will then be staged by size from largest to smallest through to 2016
Start up small business will be given additional time to prepare to comply: those
created from 2012 will be given until 2016 to start enrolling staff Employer
contributions will be phased in from 1% in 2012 to 2% in October 2016 and to
the full 3% by 2017
The Pensions Act 2007
The Pensions Act 2007 put into law reforms to the state
pension system set out in the White Paper, Security in
retirement: towards a new pension system published in
2006 Reforms cover the Basic State Pension and the State Second Pension and will change some of the qualifying conditions for both Key changes include:
1 Basic State Pension (BSP) The number of qualifying
years needed to receive a full BSP will be reduced from
39 for women and 44 for men to 30 years for both Annual cost of living increases in BSP will be linked to earnings rather than price Subject to affordability and the fiscal position the intention is to start in 2012 but, if not then, by the end of the next Parliament at the latest.
2 State Second Pension (S2P) From 2010 national
insurance credits will be introduced for those with long-term disabilities and people with caring responsibilities
so that they can build up additional pension entitlement.
3 State Pension Age State pension age will be
increased gradually, between 2024 and 2046, to 68 for both men and women to reflect increasing longevity in society and make the state pension affordable in the long term.
IFSL Pension Group: Key elements of pension reform
The guiding principle is for government to develop a framework that
enables pension funds to take appropriate account of risks in the
investment of retirement savings Key factors include:
Commitment to macroeconomic stability, low inflation and a balanced
fiscal strategy to facilitate effective functioning of securities markets and
institutional investment.
Establishing a pension system that is affordable by future generations
through: constraining the size of benefits particularly state pensions to a
sustainable level, but that also ensures poverty is alleviated; adjusting
earnings-related pensions so that there is a direct link between lifetime
benefits and contributions; and raising advance funding in countries where
pay-as-you-go dominates to meet future liabilities
Establishing an efficient financial market infrastructure including a legal
framework, a financial and accounting system, regulatory and supervisory
framework, clearing and settlement systems and a structure for the trading
of securities A risk-based supervisory framework should identify any
weaknesses in the funded pension system through the use of sensitivity
analysis and stress testing.
Ensuring the financial security of pension funds and protection of pension
beneficiaries This will help to maintain the confidence of beneficiaries and
the public at large It includes a number of features: licensing of pension
institutions; separating assets of pension funds from employers control; meeting capital requirements or solvency rules and establishing minimum funding rules; and effective supervision and self-regulation.
Applying prudent investment principles The application of rules that follow
the 'prudent man' principle have proven their worth, enabling asset managers
to access international financial markets while also ensuring a high degree
of investor protection.
Encouraging people to save: introducing fiscal incentives Experience has
shown that precisely targeted tax incentives are required if people are to save for their own retirement Care has to be taken to avoid interaction of the tax and benefit systems which might encourage early retirement or distort the general savings and investment markets.
The taxation of pension assets can in principle be applied at any one of three points: to contributions, investment income and payment of pensions The most favourable model from the investors’ viewpoint is to exempt the contribution and investment income but tax the payment of pensions This arrangement is known as EET (exempt, exempt, tax) EET and other models less favourable to the investor are set out in Chart 5.
Developing an appropriate framework for each country This commonly
includes one pillar of state provision and another of private provision, although different forms of provision may be included under each pillar.